3of5Michael Krouse, who owns three bars in S.F., hopes not to raise prices on items like Fernet Branca, but a new tax passed on from distributor Young’s could force him to.Photo: Connor Radnovich / The Chronicle

4of5Pop's, a dive bar in the Mission, has been around since 1937.Photo: Esther Mobley / The Chronicle

5of5Fernet Branca is a popular drink among service industry professionals. Its San Francisco distributor, Young’s Market Company, has announced it will be raising costs for local accounts as a result of Proposition C.Photo: Katy Raddatz / The Chronicle

Is the price of a Fernet shot about to go up in San Francisco? A major liquor distributor announced that it would be increasing its prices for local bars and restaurants due to the new gross receipts tax leveled by Proposition C, the ballot measure to fund homeless services that passed in November.

Young’s Market Co., the exclusive distributor here of familiar brands like San Francisco favorite Fernet Branca, Tito’s Handmade vodka and Jack Daniel’s whiskey, said in a letter to its San Francisco accounts that it would be changing its wholesale tax from 0.16 percent to 0.335 percent, effective Jan. 1. The company, which has its headquarters in Tustin (Orange County), cited the cost of Prop. C as the reason.

The announcement sent shock waves throughout the local bar community.

“The tone and demeanor of that letter was like, ‘F— off, San Francisco, you guys voted for this and now you’re going to pay for it,’” said Michael Krouse, who owns Madrone Art Bar, Pop’s Bar and Bar Fluxus.

Prop. C, which passed in November with 61 percent of the vote, promises to generate hundreds of millions of dollars a year for homeless services by increasing the gross receipts tax for businesses in the city with more than $50 million in revenue and the payroll tax for businesses with more than $1 billion. It went into effect Jan. 1, though the money collected for Prop. C will sit in reserve until legal challenges are resolved.

Elixir owner H. Joseph Ehermann says that the minimum wage and a new wholesale tax could force him to raise drink prices.

Photo: Michael Short / Special to The Chronicle

Elaine Beliakoff, Young’s senior director of communications, confirmed that the West Coast distributor had instated the new wholesale tax, adding that “if Prop. C is overturned and the San Francisco Treasurer & Tax Collector issues refunds, Young’s will donate the refund amount to homeless charitable organizations in San Francisco.”

“Young’s believes it’s important to be transparent to our customers on invoices regarding how the tax rate will apply to transactions within San Francisco County,” Beliakoff said.

San Francisco applies different rates for different businesses, sometimes charging based on the proportion of a company’s payroll in San Francisco, the proportion of a company’s revenue in San Francisco or a mix of both. Beliakoff acknowledged that wholesalers paid the increased rate only on their gross receipts over $50 million, but did not clarify whether Young’s was actually subject to that rate. She could not immediately address why customers were being charged the highest possible rate that Young’s might pay, as opposed to the actual rate it paid.

What bothered many bar owners about the Young’s announcement was not the numbers as much as the principle: Prop. C was supposed to draw from the pockets of the biggest businesses, not the small guys. “The general public assumed that when this was sold as a tax that would be borne by large corporations — that that’s where the economic hit would be, and they would take it,” said H. Joseph Ehrmann, owner of the bar Elixir. “But they’re not. All of these suppliers, anybody that sells anything wholesale, is going to pass that down to us.”

Krouse added, “Now we’re supposed to pay the entire thing for these corporations, and they’re not going to pay any of it?”

And the bars, in turn, may have to pass that cost down to their customers, which could mean that your Tito’s and soda might cost an extra nickel. Neither Krouse nor Ehrmann had determined whether this tax increase would necessitate price increases in their bars.

Eventually, “if my costs go up, my prices have to go up,” said Ehrmann. As a small, independent bar, Elixir doesn’t do enough volume to justify low prices amid rising costs, he said. He’s proud of the fact that he has not had to raise prices in the face of the new $15 minimum wage, but that might have to change now.

“People come in and say, ‘Wow, $9 for a pint of beer?’” Ehrmann said. “Then you have to explain.”

Krouse said he would consider not buying from Young’s, but that it would be difficult to stop carrying certain products like Fernet Branca. Madrone Art Bar goes through at least five cases a month of the bitter Italian digestif. Krouse already had to raise the price of a Fernet shot to $8 a few months ago, and he does not want to increase it further. “Fernet is something I really try to keep on the low end, because it’s a big service industry drink,” he said.

Of course, businesses passing along new costs to customers — whether distributor to retailer, or restaurant to diner — is nothing new. Some liquor distributors began charging a delivery fee when gas prices spiked about a decade ago, for example.

“I voted for Prop. C, and of course I want to see the homeless situation fixed,” said Krouse. “But I don’t think voters were looking at it through this angle.”

Wine critic Esther Mobley joined The Chronicle in 2015 to cover California wine, beer and spirits. Previously she was an assistant editor at Wine Spectator magazine in New York, and has worked harvests at wineries in Napa Valley and Argentina. She studied English literature at Smith College.